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A Model of R&D Tax Incentives

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  • Eren Inci

    (Boston College)

Abstract

This paper examines R&D tax incentives in oligopolistic markets. We characterize the conditions under which tax incentives reach the socially desirable level of firm-financed R&D spending. The outcome of the market depends not only on the level of technological spillover in the industry but also on the degree of strategic interaction between the firms. One major result emerges from the model: The socially desirable level of R&D investment is not necessarily reached by subsidizing R&D. When the sector spillover is sufficiently low, the government might want to tax R&D investments, and this result does not necessarily arise because firms are overinvesting in R&D. There are also cases in which an R&D tax is desirable even though firms are underinvesting in R&D compared with the first-best optimum. In practice, this theoretical finding calls for a lower sales tax combined with an R&D subsidy in oligopolistic industries with high technological spillovers, and a lower sales tax combined with an R&D tax in oligopolistic industries with low technological spillovers.

Suggested Citation

  • Eren Inci, 2004. "A Model of R&D Tax Incentives," Boston College Working Papers in Economics 597, Boston College Department of Economics, revised 09 Oct 2006.
    • Handle: RePEc:boc:bocoec:597
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    Cited by:

    1. Eren Inci, 2009. "R&D tax incentives: a reappraisal," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 16(6), pages 797-821, December.
    2. Inci, Eren, 2006. "Success breeds success locally: a tale of incubator firms," ZEW Discussion Papers 06-071, ZEW - Leibniz Centre for European Economic Research.

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    More about this item

    Keywords

    R&D tax incentive; social policy; oligopoly; spillover;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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